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Analyzing the Amazon Lending Library

Nov 10, 2011   [permalink]

Amazon's new "Lending Library" could be really great for authors, or could really suck big time.

It all depends on the terms.

Which nobody seems to really know.

Publishers Weekly writes, "each time a Prime user borrows a book, Amazon pays the publisher as if the book was bought."

If those are the precise terms, no fuzzy explanation involved, then that's a great deal for authors. You'd get paid every time someone checks out a book, as if they bought it.

However, if PW's reporter was even just slightly off in her description of the terms — and how often are journalists 100% correct? especially about legalistic, almost mathematical terms — then this could be a really bad deal.

How bad? Try $0 in earnings after a small number of copies are sold into the library.

Let's look at the scenarios.

If instead of buying a copy every time a book is borrowed, Amazon instead buys a book every time they don't have one in the library to lend — because either it's the first time someone's wanted to borrow it, or because all the copies are checked out, so they need an additional one, and the deal is that if Amazon already has a copy in the library that isn't checked out, they don't pay again for that when it gets borrowed (as is more like a normal library) — then there's a problem.

If Amazon purchases a small number of copies to "lend" — that number being the maximum number that were ever simultaneously borrowed — and if after that point Amazon could loan those copies again without paying another royalty (which is how a regular library would work) — then for the cost of purchasing a small number of copies, Amazon could lend that book out forever in the future without paying the author/publisher anything more.

This isn't the same as if 10,000 local libraries each bought a copy (and couldn't loan between them). This is more like 10,000 local libraries pooling all their copies together. They'd need a lot fewer copies, since demand is distributed over time and geography. With Amazon as the "one stop library" for all Kindle users, one copy can serve a lot more readers.

We don't know if those are the terms (that Amazon pays once per lendable copy, and is allowed to lend that copy as many times serially thereafter). If they are, however, it's a bad thing for authors, as it means they'll get $0 future dollars once Amazon has bought a few library copies. (That number being the high water mark of simultaneous checkouts.)

If that copy stays checked out for a month, it means Amazon has to buy another copy when someone new wants to borrow it. But in the next month, Amazon would have an inventory of a bunch of copies, and might not need to buy any more to meet demand ever again.

We also don't know that Amazon won't change the lending terms in the future. "One book a month" is just what they're doing today. They could change that any time.

The math also has a lot to do with how long the book stays checked out. If the borrower returns it in say, two days, that copy is then available for another (unpaid) checkout. If it's kept out for 30 days each time, then at least the number of simultaneous (paid-for) copies goes up.

The more flexible Amazon makes the lending rules with shorter time periods, the fewer copies will get sold and the less authors/publishers will earn.

The worst case scenario would be if they (in the future) decided to change the terms to allow loaning out ebooks by the page, a minute or two at a time, and only bought copies when there was a simultaneous demand for that exact same page. Then a small handful of copies could potentially serve the needs even of a huge bestseller. (My Ph.D. is in math & computer science, and I did indeed run the numbers on this. It's dismal. Something like 10 copies could meet the needs of a bestseller read by millions of people. Think about it — how many people in the world are on the same exact page of the same book at the same time? So if you ever hear of anything like this in the works, run screaming.)

So, the best case scenario is if Amazon pays every time a copy is borrowed. That would be a fair deal, even a good deal, for authors and publishers. Somehow I doubt Amazon is doing that, however, or even if they are initially, I doubt they'll continue doing that indefinitely. It's costly for them. Someone borrowing the (current) maximum of 12 books a year at $9.99 list = $7 to the publisher each, could cost Amazon $84 year — more than the $79 cost of Amazon Prime. Perhaps the cost of Amazon Prime would cover it in the aggregate sense... but, really, Amazon isn't noted for generosity, and with hidden terms, it seems likely they would be Amazon-friendly.

Any other terms are likely to be bad for authors and publishers.

We need to get the real terms nailed down to know if this is good or bad for authors.

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